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Chinalco set to restructure Rio deal

John Garnaut, Beijing

CHINALCO will restructure its $US19.5 billion ($25.2 billion) investment deal with Rio Tinto in order to allay Australian Government concerns about the perceived influence it may hold over the miner, well-placed sources close to Chinalco say.

Chinalco is also open to discussing proposals for Rio to issue new convertible bonds to existing shareholders in order to quell a London shareholder rebellion - provided its interest is not diluted below 15 per cent.

The Chinese Government-owned aluminium giant is also likely to support conditions from the Rudd Government that "re-Australianise" the London-headquartered Rio, which would connect management more closely with key mining assets in Australia and core markets in Japan, China and Korea.

But Chinalco would walk away rather than concede "core commercial interests" including its 15 per cent joint venture stake in Rio's Pilbara iron ore assets and its right to appoint two directors to Rio's 15-person board, say sources close to Chinalco.

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"Chinalco is not Minmetals," said one source, referring to Minmetals' decision to proceed with its takeover of Oz Minerals just three days after the Australian Government rejected the offer on security grounds.

Chinalco's willingness to negotiate coincides with vigorous discussions at the Foreign Investment Review Board in Canberra, which is due to rule on the deal by June 15.

The decision, which ultimately rests with the Treasurer Wayne Swan, is looming as the biggest test of the Australia-China economic and political relationship since 1989. The final deal would then need to be approved in Beijing, primarily by the National Development and Reform Commission. The outcome will heavily influence dozens of cashed-up Chinese companies considering investing in Australia and elsewhere.

Sources close to Chinalco say they are prepared to replace complex marketing provisions with a clear undertaking that Chinalco will not play any role in marketing or setting prices for Rio resources.

The sources said Chinalco is also willing to ditch its contractual claim to 30 per cent of Rio's iron ore production (beyond its underlying 15 per cent joint venture stake).

And they are willing to strip out "governance" requirements including some contractual rights to appoint employees to positions linked to underlying mining joint ventures.

The sources say the result would be a streamlined agreement that preserves Chinalco's ability to keep tabs on its investment while removing the Australian Government's concerns.

Also, Chinalco has no objection to FIRB conditions that might include raising the number of Australian directors from three (including one dual-passport holder), requiring certain executives to reside in Australia, or specifying a number of board meetings to be held in Australia each year.

The February deal was originally structured to satisfy guidelines from Mr Swan and the FIRB. But Chinalco and Rio appear to have underestimated the political sensitivity of Chinese investment in Australian resources.

In theory, the FIRB could ask Chinalco to resubmit its application after June 15 for further deliberation. Such a delay would prolong the Australian political debate and derail Rio's plan to put the agreement to shareholders in July.